Gazprom to Build Gas Link to Austria Bypassing Ukraine With OMV

OAO Gazprom, Russia’s biggest company, moved forward on building a natural gas pipeline to the European Union to cut transit dependence on Ukraine, the same day Russian President Vladimir Putin asked lawmakers to revoke a right to use force in the smaller country.

Gazprom and OMV AG (OMV) agreed today to create a joint venture to build and operate the 50-kilometer (30-mile) section of the South Stream pipeline in Austria at a signing ceremony in Vienna. They approved a final investment decision for the link, with capacity to carry as much as 32 billion cubic meters of gas a year, Gazprom said in a statement. That is about 20 percent of Russian exports to Europe.

Russia has pushed for South Stream after years of disputes with Ukraine, which carries half of Gazprom’s Europe-bound gas through its pipelines. Russia cut deliveries to Ukraine this month over debts as tension between the former Soviet allies mounted. Pricing rows disrupted EU flows during cold weather in 2006 and 2009.

The Austrian link “isn’t very long, but that doesn’t diminish its importance because it is the endpoint of South Stream,” Gazprom Chief Executive Officer Alexey Miller told reporters in Vienna. Today’s agreement will strengthen the role of Baumgarten, the gas hub where the pipeline will terminate, in central and eastern Europe, he said.

Dwindling Supply

The accord comes two days before European Union leaders meet in Belgium to discuss energy security strategy for the 28-nation bloc and measures to avert gas-supply disruptions in the 2014-2015 winter. The European Commission has questioned how Gazprom and its partners will use the link, while Ukraine has said Russia is using gas as a political tool.

Putin made his request to parliament today before his trip to Vienna to help stabilize the situation in eastern Ukraine, Dmitry Peskov, his spokesman, said by phone.

OMV head Gerhard Roiss said the deal will increase Europe’s security of gas supply and will comply with EU legislation, which seeks to increase competition in the market.

“Europe needs Russian gas and it will need more Russian gas as its own supply dwindles,” Roiss said at a news briefing.

South Stream, which may cost about 16 billion euros ($22 billion), will send as much as 63 billion cubic meters of gas to the EU annually. The pipeline will run 900 kilometers under the Black Sea to the Balkans, where it was planned to split into northern and southern routes, finishing in Austria and Italy.

The Austrian link is set to start operating from the end of 2016, under the 50-50 joint venture with OMV, Gazprom said in its statement. Miller said commercial deliveries will begin in 2017 and reach project capacity within 12 months. The agreement is legally binding, he said.

Italy, Austria

Gazprom shelved plans to bring the pipeline to Austria in 2011, favoring partner Eni SpA (ENI)’s home country Italy.

The Russian company signed an accord with OMV on the Austrian link in April of this year. Since then, Gazprom has considered dropping the Italian route. The company will decide about building both routes or just one by July, Leonid Chugunov, Gazprom’s project management department head, said in May. The company’s press service declined to comment on the matter today.

South Stream will be built regardless of the questions it faces in Europe, according to Miller.

“Major projects always face various working moments, and I can say that we are in a constructive dialogue with the European Commission,” Miller said, referring to almost daily talks with EU Energy Commissioner Guenther Oettinger. “The timeframe of the project has not yet been affected in any way.”

The European Commission has called for Gazprom to allow access to South Stream in line with the EU’s internal unbundling laws, a demand that Russia and the state-run exporter have rejected. Earlier this month, the commission asked Bulgaria to suspend works on South Stream, citing concerns over a public tender processes.

To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Torrey Clark, Alex Devine

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